I’ve been spending some time on the small end of the listed property trust market. They weren’t always so small, but now there are quite a number with market capitalisations of less than $50m.
I already touched on Galileo Japan in Why Galileo Lies in Astros Dust. The Value Fund already has a large stake in RNY (the old Reckson New York Property Trust).
Real Estate Capital Partners USA (RCU) looks to have some interesting optionality. It agreed to buy the US portfolio of Record Realty back in February but has had trouble arranging finance. The deal has been extended umpteen times but this Friday looks like the drop dead date.
I still have no idea where it is going to get the cash from, but the current price looks interesting (the market cap is $20m, they have paid a $12m non-refundable deposit on the Record Realty portfolio and have a bunch of US property themselves).
Most of my time, though, has been spent on ING Real Estate Community Living Group (ASX Code ILF). ILF owns retirement villages here and in the US. Remember the ‘ageing population’ investment craze? This property trust is a remnant of that mini-bubble and its performance, just as Gareth Brown suggested in Cashing in on the retirement boom, has been appalling; down more than 90% from its $1 listing price.
The interesting thing about it now, a bit like RNY, is the limited recourse nature of the debt. The overall loan to value ratio (LVR) is 73% but most of the debt is tied to the US business and is limited recourse to those assets.
The LVR on the Australian assets is only 41% and, out of a total of 24.9 cents of net tangible assets (NTA), 13.6 cents is attributed to the Australian portfolio. The current share price is 8.6 cents, so you’re getting the Aussie assets at a 37% discount to NTA, already written down substantially over the past few years, and the rest of the assets thrown in for free. So what’s the catch?
Well, I always like to compare these NTA figures to the income the assets are spinning off. If you’re buying at a big discount to NTA, you should be getting massive yield on your investment. The US assets still in ILF’s portfolio generated $6.1m of operating income last year and the Australian and New Zealand assets $11.1m. Subtract $8.3m of finance costs and you are left with a total of $8.9m of net operating income.
That is a substantial amount of income for a trust with a market capitalisation of $38m and corroborates the underlying NTA. The problem, before we all run out and load up, is that the owners don’t get to see most of that income.
Underneath the operating income line come the trust’s operating expenses ($2.5m) and ING’s management fee ($3.3m). In total, fees and admin charges chew up an extortionate 62% of operating income. (Last year’s numbers were boosted by $7.4m of derivatives income which won’t be recurring, making the overall numbers look more respectable.)
Apparently one of the main challenges for 2011 is ‘replacement of earnings from derivatives and divested assets’. Any ideas, anyone?
I’m having trouble tracking down the management agreement for this trust but, in the right hands, its assets are clearly worth more than the current unit price suggests. As things stand, though, it’s ING that is getting all the value.